Sustainable Investing: 5 things you should consider when buying ESG ETFs

Sustainable investing is growing fast as many investors want to see their money contribute to making the world a better place.

ESG ETFs are often used as a convenient way to invest in companies that are leaders in their environmental, social and governance practices, but there are now hundreds of ESG ETFs that cover different sustainability themes. What should investors look at before they decide which is right for them?

Our short guide looks at 5 things to consider.

1. What goal are you trying to achieve with ESG ETFs?

It’s key to understand why you are investing in an ESG ETF and how it will fit into your portfolio. Will the ESG ETF replace an existing fund or will it be an addition? Will it focus on a specific market, sector or region?

2. Does the approach of the ETF match your ideas of ESG?

Your idea of what is ESG may differ from other people, and there are many ETFs to cater for these different opinions. For example, with a low-carbon ETF, some investors may be happy if the worst polluting companies are excluded, while other investors will want to see only the leaders left in.

Look at the fund documents to see how the companies are chosen and make sure it matches with your idea of how an ESG fund should look before you go any further. At Trackinsight we also provide information on the ESG strategy of the fund to help you compare and select ESG ETFs that are right for you.

3. What are the exposures offered?

The way an ESG ETF is built may impact its exposure to different countries, sectors or industries. These differences may introduce an unintended bias to the portfolio. Look at the ESG ETF in the context of your portfolio to make sure that you are comfortable with the overall risk profile of your investment.

4. What are the costs?

The cheapest ETFs track main market indexes like S&P 500, FTSE 100 or Euro Stoxx 50, but there is also competition to provide great pricing in the ESG ETF universe. Perhaps counter-intuitively, lower fees do not automatically mean that the ETF will have a higher return. Make sure you are comparing the net-of-fees return of the ETF with similar funds to see if you are getting good value for your investment.

5. Who is the ETF issuer?

You might also want to look at which company provides the ETF to see if their business practices and philosophy aligns with your ideas of ESG. Do they use their power as shareholders in companies to create positive change?

Want to know more? Trackinsight’s ESG Investing platform helps you explore the ESG ETFs available in your region and offers straightforward ESG ratings to help you find the ETF that matches your sustainable goals.